Why Are Generic Drug Prices Shooting Up?

Generic drugs are copies of branded drugs, which can only be produced after the brand-name drug’s patent has expired. Although they are identical to their branded counterparts (on a variety of measures as described by the FDA), they are priced at significant discounts to the branded price. As generic drug makers go through an abbreviated and less costly process to get an approval from the FDA, prices of generics are relatively lower. (In other words, branded drug manufacturers pass on the high development costs to consumers.) The scenario was different before the Hatch-Waxman Act, which was enacted in 1984. Before 1984, generic drug makers were obligated to go through the same process as branded drugs to receive an approval from the US FDA, which created steep financial barriers to the development of generic drugs.

The Rise Of Generics

After amendments were made to the law in the favor of generic drug makers, this market saw an influx of new players, which brought generic prices further down. Currently, on average, the cost of a generic drug is 80 to 85 percent lower than the brand name product. As prices declined, usage of generics picked up rapidly. The share of generics out of all the prescriptions filled in the US increased from ~18% in 1984 to nearly 80% currently.

This decade has seen branded drugs worth billions of dollars in sales lose patents. In 2012 alone, the sales value of drugs coming off patent was $33 billion and another $47.5 billion in sales will come under threat of patent expiry this year. As terrifying as this can be to the ears of pharmaceutical companies, it is just what the doctor ordered for the US health care system, as health care expenditure is rising really fast. In the ten-year period between 2003 and 2012, generic drugs generated $1.2 trillion in savings to the U.S. health care system.

However, generic prices have been moving up for some time now, which is leading to some serious concerns for the pharmacy retail industry in the form of reimbursement rate pressure (Here’s a detailed analysis of this issue).

The Rise Of Generic Prices

According to a report by Elsevier, a drug product and pricing information provider, out of a research sample of 4421 drug groups, 222 drug groups increased in price by 100% or more (between Nov’13 and Nov’14). There are also some extreme cases (17 drug groups) where price increases of more than 1000% were seen. One such product is tetracycline, which is commonly prescribed for bacterial infections. During the same period (between Nov’13 and Nov’14), it’s per tablet price increased from $0.0345 to $2.3632. That is a 67-fold increase in one year! But, why are generic drug prices increasing at such high rates?